Question

1. Suppose that the initial demand and supply curves for coffee are illustrate by D' and St in the graph below. Assume that coffee and kringle are complements in consumption. Clearly label all additions to the graph. a) Suppose that the initial market price of coffee, Po, is $1 per cup (Po = $1). Determine and illustrate the quantity demanded at Po (labeled as Qc), and the quantity supplied at Po (labeled as Qoʻ). Show Qoand Qos on the quantity axis. Is the market in equilibrium at Po = $1? If not, state whether a surplus or shortage exists at Po, calculate its magnitude, and illustrate it graphically. Illustrate and explain the market equilibrium quantity and price, denoted Q,* and Pi*, and label the market equilibrium as point E. b) Next, suppose that the price of kringle decreases. In the same graph, illustrate and explain the resulting new market equilibrium quantity and price for coffee, Q* and P2*, and label it as point E. Price, PT : Si 2.50 2.00 100 200 300 400 500 600 700 Quantity, Q

Answer 1

a. Suppose the market equilibrium is where the supply and demand curve intersects at point E¹ with respect to which market equilibrium price is $1.50 and market equilibrium quantity is 300 units. Now at price level Po, I.e at price level of $1, quantity demanded is Qo^d I.e 400 units and quantity supplied is Qo^s I.e 100 units, hence as at Po quantity demanded exceeds quantity supplied, hence at price level Po there exists a shortage of (Qo^d-Qo^s)= ( 400-100)= 300 units.


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b. Now as Kringle and coffee are complements in consumption, as price of Kringle decreases, people will consume more of coffee and hence demand for coffee will increase and the demand curve will shift rightward from D1 to D2 and as the economy moves from point E¹ to point E², the equilibrium price of coffee will increase from P1 to P2 and the equilibrium quantity of coffee consumption will increase from Q1 to Q2.


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2. As Spam is an inferior good, which means that income elasticity of demand for spam is negative. Hence as consumer’s  income increases, demand for spam will decline. Thus here as consumer income increases, demand for spam falls, and the demand curve will shift leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of Spam will decline from P1 to P2 and the equilibrium quantity of Spam will decline from Q1 to Q2.

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3. As apples and bananas are substitutes in consumption, thus as price of bananas increase, then consumers will switch to apple consumption and hence the demand for apples will increase and the demand curve for apples will shift rightward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of apples will increase from P1 to P2 and the equilibrium quantity of apples will increase from Q1 to Q2.

Supply 7 Dr ai Q2 Quality cs Scanned with CamScanner